Reinventing economic development: Game over

By Mark Lautman

Published 8/26/11


New Mexico’s economic security blanket, the federal government, which has buffered us from the ravages of business cycles and recessions, is gone for good. The Aug. 2 federal budget deal dashes any chances that New Mexico will emerge from the recession any time soon, and flips the federal government sector from being our single greatest source of economic base jobs to our biggest economic liability.

On Aug. 17, the White House Office of Management and Budget asked all federal agencies to submit spending plans with reduction scenarios of 5 and 10 percent. If the congressional gang of 12 can make decisions based on value judgments, we might fare better than if they default to across-the-board cuts. Either way, it’s not a matter of whether we are going to lose federal economic base jobs, it’s how many, what kind and how fast.

If you take eight zeros away from the federal budget predicament and put things on a personal scale, proportionately, it looks like this:

  • Yearly personal income: $21,700
  • Yearly spending: $38,200
  • Amount added to credit card limit this year: $16,500
  • Outstanding balance on the credit card: $142,710
  • Amount cut from yearly budget this round: $385

They’ll cut $385 from the budget to offset a $16,500 deficit. You don’t have to be a visionary to conclude that this is only the beginning of the federal government’s downsizing.

While much of New Mexico’s federal economic base sector is in high-priority, hard-to-cut categories, we are going to take a serious hit. Besides losing the only economic base growth sector we have left, the federal jobs we stand to lose are economic base jobs, meaning every one lost will take two to three service sector jobs with it.

There are only two kinds of jobs: economic base jobs whose products and services are sold outside the economy and make the economy bigger, and service-sector jobs whose products and services are sold locally. Without this distinction, we could solve all our unemployment problems by opening 10,000 laundromats.

Since most of New Mexico’s federal related jobs are funded by taxpayers from other states, all the cuts will come from our economic base.

Our exposure to these cutbacks is magnified because a third of the state’s economy is based on federal spending. Employment at Kirtland Air Force Base alone accounts for nearly one of every 14 jobs in the state. Federal spending in New Mexico actually grew every year of the recession, substantially softening the blow of the first dip. From here on out, we are working without a net.

The question is: In a slow or no-growth economy, with the federal government taking instead of giving economic base jobs, how is New Mexico supposed to replace the 55,000 jobs we lost in the first recession, replace the ones destined to be lost under the budget deal, and create the new ones needed to actually grow the economy? Unless someone has a theory of how to shrink our way to prosperity, we will have to create tens of thousands of new economic base jobs from out of state.

There is only one option: Make New Mexico a haven for private-sector, high-value economic base activity by becoming the national sanctuary for economic base activity.

Exempt all new high-value economic base activity in targeted, high-value sectors from state and local property, investment, payroll and income taxes (which would affect 15 percent of the employers). Eliminate punitive regulations and align our educational institutions to develop the necessary intellectual and human capital.

It’s corporate welfare, but we do it already. If we waived taxes for economic base work done here, economic base employers would kick down our doors. Each new job would generate additional service-sector jobs.

We could jettison the 35 odd economic development incentives on the books, then all the economic developers we pay to explain them could start taking orders.

The rest of us would have to pay higher taxes, but we would be paying them in a growing economy.

I can’t think of a bigger threat the state has ever faced. Once confronted, it will either demoralize or motivate us. But it’s not going to fix itself, and a mere tweaking of policies won’t work. It’s going to take radical and urgent action.

If there was ever a subject deserving a special legislative session, this is it. We’ve been talking about the need to develop a private-sector economy for decades. Now we don’t have a choice.

The game is over. We need a new game.